Nintendo Chief Is All Work, No Play

Seeking a Turnaround With Souped-Up Machines and a Few New Games

By ANDREW POLLACK

Published: August 26, 1996

KYOTO, Japan—
Visitors to the Nintendo Company headquarters get a taste of the personality of its president, Hiroshi Yamauchi, the minute they walk through the door. The lobby, hallways and conference rooms are all bare walls and plain tiles. There are no video game machines, no posters, no Mario dolls, nothing to suggest that this is the lair of a company that provides entertainment to millions of children.

To Mr. Yamauchi, any decoration is a needless distraction. Video games, which he himself does not play, are business, not fun.

With such single-minded devotion, Mr. Yamauchi transformed a playing-card company founded by his great-grandfather into a video game colossus that at one time a few years ago was the most profitable company in Japan. But Nintendo was late with two generations of new machines, letting first Sega Enterprises Ltd. and then the Sony Corporation break up what was once its near-monopoly.

Now, the 68-year-old Mr. Yamauchi is attempting what could be his last hurrah, a comeback with Nintendo 64, a powerful new game machine that went on sale in Japan in June and will reach American stores at the end of September.

Nintendo is about a year behind schedule in shipping its machines, and there are already hundreds of games available to play on the Sony Playstation and Sega Saturn. Nintendo has only three titles.

But those are odds Mr. Yamauchi likes. ''Those who believe that 'the more games the better' are just ignorant of the actual market situation,'' Mr. Yamauchi said.

Too many games means that some will be of poor quality and will disenchant consumers, he said. Indeed, he said that the whole video game business could crash next year because there are too many uninteresting games for other manufacturers' machines, just as happened in 1983, when the Atari Corporation and the business it fostered collapsed.

''The current flood of thousands of games each year is surely ruining the market,'' he said. To keep consumers hooked, he said, new game experiences different from those in the past must be developed.

Many market observers discount Mr. Yamauchi's gloomy prophecy as mere posturing. Still, the big question in the coming battle is whether Mr. Yamauchi can execute the same strategy that he used so well in the past.

Nintendo plans to tightly restrict the number of games developed for its machine to assure high quality. It also plans to develop most of the games by itself, at least initially. Outside companies can make games, but under terms that give much of the profit to Nintendo and much of the risk to the software company. Nintendo's machine will use game cartridges, which software companies will have to buy from Nintendo for prices upwards of $40, rather than the far cheaper CD-ROM's used by Sony and Sega.

In the past, when Nintendo had a near monopoly, outside companies had little choice but to go along with such terms. Now, some companies, like two of the leading Japanese game designers, the Square Company and Namco Ltd., are shunning Nintendo for Sony, which is actively recruiting developers.

''Right now, it's the other side of the coin,'' said Henk Rogers, a software entrepreneur who licensed the Tetris game for Nintendo machines. ''No one wants to be on Nintendo, so they have to be nice to us.''

But, Mr. Rogers added, ''I'm not saying they are nice; I'm saying they need to be.''

Indeed, Mr. Yamauchi's stance on outside game designers was shown last November when Nintendo first introduced the Nintendo 64 at an exhibition in Tokyo. Several companies raced to get prototypes ready to demonstrate on the new machine. But the night before the big event, Mr. Yamauchi decreed that only Super Mario 64 and Kirby's Air Ride, both developed by Nintendo itself, would be shown.

In the first round of the battle, Nintendo has scored well. The company said it had shipped 1.1 million machines in Japan in the first month and a half, beginning in June, and estimated that 90 percent had been sold to consumers. The company expects to ship a total of 3.6 million in Japan and one million in the United States by the end of next March. This is a much faster initial pace than that of Sony or Sega.

The strong early performance is a testament to the Nintendo 64, which can display dazzling three-dimensional images using technology supplied by Silicon Graphics Inc., the American work-station manufacturer. The Nintendo 64 handles 64 bits of information at a time, making it more powerful than the 32-bit Sony and Sega machines.

Nintendo ''basically made the industry sit up and take notice,'' said Lee Isgur, an analyst at Jefferies & Company in San Francisco.

The sales are being buoyed by just one game, Super Mario 64, which perhaps exemplifies what Mr. Yamauchi means by creating new experiences. Super Mario 64 is drawing rave reviews for its ability to let the mustachioed plumber with the red cap run in three dimensions, into and out of the screen as well as across it. Some American game magazines say it is the best video game ever.

But there is a limit to how much one plumber can do, even one who can increase his power by grabbing magical stars. It remains to be seen whether Nintendo can keep supplying such good software. Recent Japanese newspaper reports that sales are weaker than expected have driven down Nintendo's stock. The company has denied the reports, citing its own sales and earnings figures, but some retailers do say that sales of the Nintendo 64 have stalled and probably will not resume until new games appear in the fall.

''Sales stopped suddenly around July 20,'' said one Tokyo retailer, who had sold 180 of the 200 machines he had received. Another said his store had sold only 20 of its 40 machines.

But Nintendo appears to be getting more aggressive. It just lowered the American price for the machine to $200, $50 below the price in Japan and the same as the prices for the Sony and Sega machines.

It would be foolish to write off Mr. Yamauchi. ''He's a tough old bird,'' Howard Lincoln, the chairman of Nintendo of America, said. He said his boss ''doesn't think about anything except Nintendo.''

Mr. Yamauchi has no hobbies except the Japanese board game Go, which he plays at the master's level. The one sign of wealth -- his 11 percent stake in Nintendo is worth about $1 billion -- is the centuries-old family house and Japanese garden, on a narrow street behind a temple in Kyoto. The estate is surrounded by a wall topped with bamboo staves, barbed wire and iron spikes.

A blunt man with thinning silver hair, Mr. Yamauchi has ruled Nintendo with an iron hand. Those who have been in negotiations with him say that he is not above lambasting an idea offered by a subordinate as ''dasai,'' a slang term meaning lame or uncool. The chairman of Microsoft, William H. Gates, no shrinking violet himself, met Mr. Yamauchi for the first time a couple of months ago and came out of the meeting saying he understood where Nintendo's combative corporate image came from.

Yet Mr. Yamauchi, who has no technical background, does give leeway to creative people and has allowed the American subsidiary to adjust to the United States market. For example, the subsidiary is more aggressive in marketing and public relations.

''He's not a hardware guy,'' said Mr. Rogers, the software entrepreneur who considers Mr. Yamauchi one of his heroes. ''He doesn't understand games. He understands people and he plays people.''

At Nintendo, people seem motivated mainly by their desire to win Mr. Yamauchi's praise or avoid his scorn. There is little done to increase corporate morale. Nintendo had no celebration of the company's 100th anniversary in 1989. There is one company-paid trip for employees each year, to places like a hot springs resort or Tokyo Disneyland. But Mr. Yamauchi himself never goes.

Despite Nintendo's fame, Mr. Yamauchi has avoided the limelight. The company held its first meeting ever for securities analysts only this year. He participates in no business trade groups or civic associations. ''I think I'm involved in community service sufficiently,'' he snapped. ''I'm the biggest individual taxpayer in Kyoto, and Nintendo is the largest taxpayer over all.''

He did make one civic gesture, buying control of the Seattle Mariners to keep the baseball team in Seattle, near the headquarters of Nintendo of America. But since the 1992 purchase, Mr. Yamauchi has not been to a game.

Perhaps some of his gruff personality stems from his upbringing. When he was a little boy, his father deserted the family, and Mr. Yamauchi was raised by his stern grandparents. Years later, when his old and ailing father returned, hoping to see his only son, Mr. Yamauchi refused to meet him, according to ''Game Over,'' a book about Nintendo by David Sheff. After his father died, Mr. Yamauchi came to regret his earlier snub and visited his father's grave frequently.

Mr. Yamauchi joined the family business in 1949, when his grandfather fell ill and called his grandson to his bedside. Hiroshi Yamauchi, only 21, would have to drop out of Waseda University and assume the company presidency. He agreed to do so on the condition that a cousin working for the company be dismissed, to make it clear that he alone was in charge. After he took over he further solidified his authority by dismissing all the officers left over from his grandfather's reign.

In the 1960's and 1970's, as the playing-card business was faltering, Mr. Yamauchi directed his company toward one type of toy or game after another.

Nintendo's big success came with the Nintendo Entertainment System, known in Japan as the Famicom, for family computer, an 8-bit machine which appeared in the mid-1980's. The company also succeeded with its pocket-sized Game Boy.

But Sega beat Nintendo to market by two years with a 16-bit game machine. Sony's 32-bit machines have been outselling Sega. Nintendo, meanwhile, shipped a 32-bit machine called Virtual Boy, featuring virtual reality technology, that bombed.

The result has been that Nintendo's annual sales have fallen by nearly half in the last three years, to 354 billion yen, or roughly $3.5 billion, as of the end of its fiscal year in March. Net income of 60 billion yen, or $600 million, is down by a third from three years earlier. The company still has $4.3 billion in cash, however.

Longer term, Nintendo faces other challenges. The personal computer is becoming widespread and is more commonly used to play games. And multiplayer games on the Internet are a potential competitor.

Nintendo is working on an Internet strategy. But Mr. Yamauchi seems in no hurry, arguing that neither PC's nor the Internet can offer inexpensive games that are as exciting. ''In my mind a video game is a video game, a PC is a PC and Internet is Internet,'' he said.

Another question confronting Nintendo is what will happen when Mr. Yamauchi retires. His son, Katsuhito, works in Nintendo's advertising department but is not considered to be a likely successor.

Most bets are on Minoru Arakawa, Mr. Yamauchi's son-in-law, who founded and is president of Nintendo of America. But two years ago in an interview, Mr. Yamauchi publicly chastised his son-in-law for his lackadaisical response to Sega. He then promoted the more aggressive Mr. Lincoln to chairman of Nintendo of America.

Mr. Yamauchi is not letting on, however, and probably not letting go. ''Personally I want to retire but I don't think there is a good successor at this point in time,'' he said.

Photo: Hiroshi Yamauchi, the president of Nintendo, has built a video game colossus from the playing-card company founded by his great-grandfather more than 100 years ago. (Tatsuo Tatsumi for The New York Times); Mario circa 1981; Mario circa 1996.; Sony's Crash Bandicoot; Sega's Sonic the Hedgehog. Chart: ''A Familiar Challenger Has a Whole New Game'' The Nintendo 64 video-game console has a 64-bit processor, enabling faster play and more complex graphics than 32-bit machines like Sony's Playstation and Sega's Saturn. But Nintendo has been delayed for a year, during which Sony and Sega built up a base of millions of users. Whether Nintendo, with help from Mario, can penetrate that base is the challenge. Here are the players. Graphs: ''The Numbers Game'' shows revenue and net income for Nintendo, 1992-1996. (Source: Company report) (pg. D2)